Advisers can chisel away at fee structure

Onlythose living under a rock can claim unfamiliarity with the dismal financial predictions for today’s workers.

The harsh reality is that for anyone old enough to, say, be at Cold Chisel’s‘LastStand’,there is unlikely to be anything left in the government’s pension kitty to help fund our retirement.

Nevertheless there is at least one good thing to come out of this grim situation. And that is the fact that more people are taking on the responsibility of providing for their longer term financial wellbeing.

Day by day, investors are learning more about what they need to do to enable them to retire with dignity. Everyday workers are becoming investors by being forced to take control of their own financial futures.

This transition of today’s ‘workers’ to tomorrow’s ‘investors’ has huge potential for the financial planning industry.

In research recently commissioned by Citibank it was found that 84 per cent of high income earners do not have a financial plan. One would expect even fewer low to middle income earners to have a financial plan, which all adds up to an enormous opportunity for the financial planning community. Now is the time for planners to leverage the integral role they can play in the long-term wealth accumulation required for the future of today’s population.

The Financial Planning Association (FPA) agrees, predicting its membership, which represents 80 per cent of the industry, to continue to grow at 10 per cent per annum from its current 14,500 members to around 25,000 over the next 10 years.

Such expected growth naturally attracts increased attention. Financial planning has become subject to greater scrutiny, including higher professional standards, such as those required under the Financial Services Reform Act introduced in March this year.

Such standards seem straightforward enough, but with the increasing pressures on planners, along with the complexity of global investment, how do planners make sure they are not just meeting the standards but are also setting themselves apart so that they are a planner of choice?

Wearing my “personal investor” hat I have to say that I’m less concerned about what standards my planner is meeting than I am about whether he or she is providing a service that delivers what I want at the best possible price.

It is only natural for today’s more sophisticated investor to not only look for true value in the service they receive from planners but also be more savvy about what they interpret as value.

Planners, and indeed, product providers, will need to adapt their focus to this approach. The simplest and most effective way to do this is to separate, where possible, remuneration for advice from the product delivery structure.

We are already seeing this shift in the industry and while many planners may be reluctant to accept the fee-for-service structure, it is clearly in their interest to embrace it as the model of the future.

One of the best examples of the separation of advice remuneration from product is the exchange traded fund (ETF). Since early last year, variations of the ETF have been available in Australia through a number of providers, including State Street Global Advisors.

The ETF provides planners with an ideal solution for clients who want direct access to the broad equity market in a simple, transparent, flexible vehicle at minimum cost. With such an easy solution to such a common need, Australian planners will no doubt want to ensure that their clients are aware of ETFs.

Worldwide, more than $200 billion dollars are now invested in ETFs since their launch less than a decade ago. Such growth speaks for itself as planners and investors have increased their understanding of the unique combination of benefits of this investment tool.

ETFs work a little differently (there is no trail), but they provide planners who have the freedom to step outside the traditional trail structure with an opportunity to broaden their scope.

Reconsidering the remuneration structure enables planners to position themselves with a focus on other value-adding areas of advice. With a holistic approach to planning and less reliance on trails, relationships with clients are built through mutual respect and understanding.

What clients want from their planner is a simple, efficient, value-for-money solution to their long term financial needs. Tailoring your business model to leverage that can only help planners create long term value and benefit for their businesses across the nation.

Lochiel Crafter is ChiefInvestment Officer of StateStreet Global AdvisorsAustralia.